How Much Is ThatBy Regina Kwon | Posted 2002-03-01 Print
Cost overruns. Delays. Infighting. Most problems in the development lifecycle can be traced back to scope creepincluding project failure.Feature in the Window?"> Exercise: How Much Is That Feature in the Window?
When weighing the benefits of a new feature, most companies consider only the initial development cost. The true cost, says Douglas Hubbard of Hubbard Decision Research, is up to four times as much. "This doesn't mean you don't add features," he says. "But your company might create a higher standard for them."
Baseline worked with Hubbard to assess the total costs of adding a new feature to a hypothetical development project. Six months into the project, the business owners have requested a new feature.
The New Feature
Expected Cost: Development
Labor costs comprise $900,000 of the $1M budget, for a monthly rate of $75,000. The feature takes two additional months to build.
Hidden Cost No. 1: Deferred Benefits
If a project is delayed, so, too, is the return you expected. Here, the diversion of labor will set back the project two months.
Hidden Cost No. 2: Maintenance
Don't forget to account for upkeep. On average, says Hubbard, five years of maintenance costs about the same as development.
Hidden Cost No. 3: Additional Expected Loss
When a project gets killed, you pay a cost of cancellation, for labor and nonreturnable purchases. In our example, canceling after six months costs $550,000 in labor, hardware and software. Multiply that cost by the risk of cancellation to derive a project's "expected loss." Risk is related to a project's duration, says Hubbard; for each of the first 24 months, add 1.2%. That works out to a 14.4% cancellation risk for this 12-month project. Then find the additional expected loss caused by lengthening the project. "It's not as large as the other costs," says Hubbard, "but sometimes it's the straw that breaks the camel's back."
The Bottom Line: The new feature's cost, $513,200, turns out to be more than three times as much as originally anticipated. A quick calculation (that does not account for inflation) shows that the cost per month over five years is $8,553; when compared with the projected savings of $10,000 per month, the feature is beneficialthough by much less than originally expected.
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